A:

An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. In the majority of cases, this will deal with problems arising with margin requirements. When you sign up for a margin account with a brokerage firm, that firm obtains the legal right to liquidate your account when you are unable to meet the account's requirements.

There are two main account types: cash accounts and margin accounts. A cash account only allows an investor to purchase securities up to the amount of the cash held in the account. For example, if an account has $10,000 in cash, the account holder will only be able to purchase a maximum of $10,000 worth of stock.

With cash accounts, a brokerage firm does not have the same ability to liquidate unless it is in regards to an external factor like a personal bankruptcy. A margin account, on the other hand, allows investors to borrow money from a brokerage firm on top of the money they have placed in the account, usually up to 50%. Therefore, if you have $5,000 in the account, you could potentially purchase $10,000 in securities.

A typical requirement of a margin account is to maintain at least 25% equity, or your own money, of the total market value at any given point. For example, suppose you purchase $10,000 worth of stock with $5,000 of your own money and $5,000 of margin money. If the value of this position were to fall to $7,500, your equity position in the investment falls to $2,500 ($7,500-$5,000), which represents 33% margin - above the 25% requirement.

However, if the value falls to $6,500, your equity in the position would be reduced to $1,500 ($6,500-$5,000), which puts your margin at 23%, falling below the minimum margin requirement of 25%. If the account does fall below the minimum maintenance margin level, you will either have to add more money to the account to meet the margin call or your account will be liquidated in part or in full.

For more information, read the Margin Trading tutorial.

RELATED FAQS
  1. What does it mean when I get a maintenance margin call?

    Understand how maintenance margin calls work, and learn about how margin requirements are different for trading stock versus ... Read Answer >>
  2. What does it mean when I get a Fed margin call?

    Learn what a fed margin call is, what it means when you receive one and what steps you must take to satisfy the fed's requirements ... Read Answer >>
  3. What are the different types of margin calls?

    Learn the differences between margin calls and fed margin calls while reviewing the definitions of each and how to satisfy ... Read Answer >>
  4. What is the difference between initial margin and maintenance margin?

    Learn the difference between an initial margin requirement and a maintenance margin requirement and how these affect an investor's ... Read Answer >>
Related Articles
  1. Financial Advisor

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  2. Investing

    Buying on Margin

    When an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
  3. Trading

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  4. Financial Advisor

    Margin Investing Gets A Bad Rap, But For The Thrill-Seeker, It's Worth It

    Investing on margin can be profitable but it's a risky play that needs care.
  5. Trading

    Forex Basics: Setting Up An Account

    The line between profitable forex trading and ending up in the red may be as simple as choosing the right account.
RELATED TERMS
  1. Remargining

    The process of bringing an account up to minimum equity standards ...
  2. Buying Power

    The money an investor has available to buy securities. In a margin ...
  3. Margin Debt

    1. The dollar value of securities purchased on margin within ...
  4. Initial Margin

    The percentage of the purchase price of securities (that can ...
  5. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions ...
  6. Trading Account

    1. An account similar to a traditional bank account, holding ...
Hot Definitions
  1. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  2. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  3. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  4. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  5. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  6. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
Trading Center